If lawmakers walk away this year without an agreement to bring new revenue into the state by extending a temporary sales tax hike and cutting the value of popular tax deductions, the state could quickly fall into deep financial trouble, according to an analysis of new budget projections.
An estimate by Gov. Sam Brownback’s budget division shows that Kansas would burn through all its reserves and have to cut $64 million in 2014 if no tax policy changes are approved. That would balloon to $545 million in cuts in 2015, the figures show.
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“I don’t think we can walk away without a plan in good conscience,” said Wichita Republican Sen. Les Donovan, who is the Senate’s chief tax negotiator. “To postpone what needs to be done, in my mind, would be bad policy.”
New state tax revenue estimates released Friday show the tax cuts Brownback signed into law last year will lead to sharp declines in income, which is the primary reason lawmakers are considering 2 percent to 4 percent cuts to higher education, reduced funding for aviation training and less money for the state’s courts system. Even with those cuts, the state could face a gap between anticipated revenue and spending in coming years.
The new estimates didn’t do much to change the debates over tax and spending in the statehouse.
Lawmakers are still under pressure from Brownback to extend a temporary six-tenths of a cent sales tax hike that came in the face of the recession and is slated to expire in July. House Republican leaders say they have no appetite for extending the sales tax, even if it accommodates more income tax cuts, and they’ve voted 120-0 against a Senate tax cut plan that depends on extending that sales tax.
But Brownback is trying to rally Republicans around his plan to extend that sales tax rate as part of an effort to further reduce income taxes, raise more revenue for the state by phasing out tax deductions and, in turn, potentially protecting higher education from 2 percent to 4 percent cuts that university officials warn could set the state back a decade.
These budget problems are primarily driven by the hastily-approved income tax cuts Brownback signed into law a year ago after lawmakers drastically altered Brownback’s original proposal in hopes of killing it.
That tax cut eliminated taxes on profits for nearly 200,000 businesses and farms and dropped rates for individuals. Brownback and his conservative allies in the legislature and at the Kansas Chamber of Commerce say cutting taxes is the best way to spur economic growth, which, in turn, will produce thousands of new jobs that feed the economy and spur increased new sales and property taxes.
Brownback’s budget director, Steve Anderson, provided updated estimates of how Brownback’s budget and tax plan would shake out under revised revenue estimates.
They show Brownback’s budget and tax plan, which hinge on continuing the sales tax and eliminating the home mortgage deduction immediately, would provide the state with roughly 9 percent of their total spending left in the bank next year and in 2015.
Democrats and many moderate Republicans, meanwhile, say it’s a reckless plan that endangers K-12 education, highways and higher education. Recently, two top economists from opposite ends of the political spectrum agreed that the plan Brownback signed is the worst in the nation.
But Brownback’s administration says the cuts he approved last year have to be looked at in conjunction with his proposal this year, which helps pay for some of that cutting by phasing out tax deductions, such as the popular mortgage interest deduction.
“What I put forward was different than what passed last year,” Brownback said earlier this week.
Now, he said, he wants to broaden the tax base and that’s part of his original plan.
“You’re seeing step two of what we proposed last year,” he said.
The Senate rejected Brownback’s proposal to eliminate the mortgage interest deduction in favor of a plan to phase out all deductions, except the charitable contributions deduction. Their plan, which is closest to the governor’s, would bring in $497.3 million in new revenue over five years to offset the budget problems caused by last year’s tax bill. Most of that would come from extending the sales tax increase.
The House rejected Brownback’s plan and created its own, which would cut the value of deductions, bringing in $391.8 million in new revenue over five years.
The governor’s plan would have brought in $685.3 million in new revenue over five years, with most of it coming from the sales tax continuation.
Donovan said he hopes to reach some sort of agreement, and he predicted that nobody would like it.
“When we walk out of there and a lot of people are unhappy with us, it’s a sign we didn’t favor one faction over the other,” he said.